- Office vacancies continued to rise, up one percentage point, to 14.2%.
- While below those of the Great Financial Crisis, vacancies are rising faster than they did then.
- Negative net absorption of 45 million square feet set a single-quarter record.
- Sublease space now tops 200 million square feet, but its growth rate has decelerated over the past two quarters.
- More than 50% of the U.S. population over 18 has received at least one vaccine shot, setting the economy up to rebound strongly in 2021.
Despite turning the page on a new calendar year, the U.S. office market continued to resemble that of the last half of 2020. Pandemic-induced headwinds generated by social distancing and working from home remain a challenge.
The overall U.S. office vacancy rate increased by one percentage point in the first quarter, to 14.2%. Downtown vacancies increased 1.3 percentage points during the quarter, to 13.5%. The suburban vacancy rate is 14.4%, but it has fared better than that in downtown markets throughout the pandemic, increasing year-over-year by 2.1 percentage points compared to 3.3 percentage points in the central business districts.
While it hasn’t eclipsed the recent high-water mark of 16.3% during the Global Financial Crisis (GFC) in 2010, the vacancy rate is setting a record for the speed at which it is climbing. During the eight quarters of the GFC, the largest increase in any single quarter was 0.7 percentage points, and 2.4 percentage points on a rolling four-quarter basis. In Q1 2021, the year-over-year change reached 2.7 percentage points.
Absorption declined a steep 45 million square feet after falling by more than 95 million square feet during the last three quarters of 2020. That beat the previous record for a single quarterly loss: 43 million square feet in 2003. Absorption losses, evenly distributed between downtown and suburban submarkets, were -22.9 million square feet and -22.3 million square feet, respectively.
In twelve metro office markets, negative absorption hit more than one million square feet in the first quarter. Manhattan easily outpaced the other markets at -10.9 million square feet, followed by Dallas (-2.9 million square feet), Atlanta and Washington, D.C. (-2.8 million square feet), Seattle (-2.6 million square feet), and Los Angeles (-2.4 million square feet).
Sublease space was a headline story in 2020, increasing by 55% overall last year. While the total available surpassed 200 million square feet in the first quarter, this space has hit the market more slowly over the past two quarters.
Despite the growth in overall vacancy and sublease space on the market, average full-service asking lease rates have remained resilient throughout the pandemic, as landlords have held firm on pricing. Leasing remains well below pre-pandemic levels, and the spread between asking and effective rates is widening: landlords continue to offer generous concessions via free rent and tenant improvement allowances instead of lower starting rates.
Evidence suggests that the tide may be turning. The pace of vaccine inoculations began to ramp up in early February, providing both hope and increased immunity. With more than 50% of the total population over age 18 vaccinated with at least the first dose, the economy is primed for an explosive rebound during the year as restrictions are lifted. Return-to-office dates are firming, though tenant strategy remains slow and calculated. A recovery is still most likely several quarters away but signs of growth, particularly from tech tenants, are promising